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Fed law changes prompt educators CU to drop student loans

SPOKANE, Wash. (4/15/08)--A change in a federal law has been cited by Spokane Teachers CU (STCU) as the key reason it has dropped out of the student loan business. “We are not alone,” STCU President Steve Dahlstrom told News Now. “Hundreds of credit unions and banks nationwide are dropping out of the student loan business." There are two sections in H.R. 2669 that significantly reduce the margin on student loans to the point where continued participation is unfeasible, Dahlstrom explained. Sec. 201, which phases in cuts in the interest rate charged to undergraduate student borrowers under the Federal Family Education Loan (FFEL) and Direct Loan (DL) programs, thereby reducing the rate to 3.4% in July 2011 from 6.8% in July 2006. Sec. 305 changes the formula for calculating special allowance payments (SAPs) made to FFEL lenders, to compensate them for the difference between FFEL interest rates and market rates, by reducing the lender rate: (1) by 0.40 percentage points for loans held by nonprofit lenders; and (2) by 0.55 percentage points for all other lenders. It equalizes the SAP rate for FFEL Stafford and PLUS loans. Sec. 305 also increases the loan fee charged FFEL lenders from 0.5% to 1% of the principal amount of loans first disbursed after September 2007. It also prohibits its collection from borrowers. “In 2007, our total STCU loans disbursed--including all loan types--was $339 million. Of that, student loans accounted for $9.3 million,” Dahlstrom said. “The rates of reimbursement are our gross income, but do not include our cost of funds, or our cost of origination,” he added. “While the intent is to reduce the cost to students and to the government, the result is to limit the supply and create a liquidity crunch, as lenders--such as credit unions--drop out of the program. The government cuts its costs which reduces the interest that credit unions receive.”